Friday, 14 October 2016

California Legislative Analyst Office Reviews Film Tax Credit Impact

I have previously written about California’s film tax credit
system and interstate competition, here and here. The California Legislative Analyst Office has
recently published a report concerning the impact of California’s film tax
credit. While noting that the film tax
credit likely prevented some jobs and production from leaving the state, it
asserts that around 30% of projects receiving the credit may have occurred without
the credit. How does the report reach
that conclusion:

Some of the motion picture projects under the first film tax
credit program probably would have filmed in California even if they had not
received a tax credit. We explain below how we were able to estimate these
windfall benefits arising from the first film tax credit.

Tax Credit Lottery Allows for Natural Experiment. It is
impossible to identify with certainty which projects would have been made in
California, which elsewhere, and which not at all, had they not received a film
tax credit. Because of the way the first film tax credit was administered,
however, we are able to roughly estimate the probability that any given film or
television project might have been made in California without a tax credit.
Beginning in 2011, the program was over-subscribed on the first day
applications were accepted—with the demand for film tax credits far
outstripping the available amount—and tax credits were mostly allocated to
projects through a random process. This allowed for an imperfect natural
experiment, as some projects were allocated a credit and other similarly
situated projects were not. The California Film Commission (CFC) collected some
information about projects that applied for and did not receive a tax credit
from the program—whether they were made and, if so, where. (As noted elsewhere
in this report, many projects were never allocated a tax credit because there
was an insufficient amount of tax credits available. In other cases, some
applicants received an allocation but withdrew from the program for various
reasons—some of these were made eventually, but without a tax credit from
California. When that happened, those tax credits became available for other
projects that had been placed onto a waitlist. However, many of these began
filming—in California or elsewhere—prior to being offered an allocation.) We
supplemented this CFC data with publicly available data sources, such as
information from the Internet Movie Database and Variety. Looking just at the
film tax credit applicants in 2011, 2012, and 2013—the three years for which we
have the best data—we see that 199 projects applied for and did not receive a
film tax credit but were eventually made. Of these, as we show in the figure,
one-third—66 projects—filmed in California without receiving a tax credit.
Dozens of other project applicants that did not receive a film tax credit from
California were filmed in British Columbia, Georgia, Louisiana, New York, and
elsewhere.

The report notes that public subsidies such as the tax
credit should be avoided [but are understandable given interstate competition]. However, it
also notes that the economic impact is relatively substantial—although difficult
to measure well:

It is important that we emphasize that it is impossible to
precisely measure the net change in an economy caused by a tax credit or any
other policy change because many other economic changes are occurring
simultaneously. It is not possible to know what the economy would have done had
the policy not been adopted in the first place. We note that there is some
uncertainty in the underlying data we use in this evaluation and, as we
discussed in the nearby box, limitations to the methods that are used to
estimate indirect and induced economic effects. Finally, any assessment of the
full economic value of the opportunity costs is inherently subjective, as we
cannot know how foregone revenue might have otherwise been used.

Overall, we think that the first film tax credit program
probably increased the economic output of California by between $6 billion
and $10 billion on net. This is a total amount over a period of more than
a decade. The annual increase in likely economic activity—typically under
$1 billion per year—boosts California’s economic output by no more than a
few hundredths of a percentage point.

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